Guru Investment Theses on Gannett Co Inc

John Rogers Comments on Gannett Co. - Nov 05, 2013

In contrast to our financial names, one of our best performers during the quarter was a name many challenged in the not-so-distant past. As many know, although our media names fall squarely within our circle of competence as evidenced by our deep expertise in the industry, they represented some of our poorest performing and most controversial holdings during the worst of the financial crisis. During that tough period, we re-examined every position with a fresh perspective that required us to consider each stock from a lens of having never owned it. In the case of Gannett Co., Inc. (GCI), despite its underperformance, we still saw tremendous value and, true to our contrarian leanings, doubled and tripled down on the holding as the price became more and more attractive—making the stock one of our largest positions. It is important to note, after taking some lumps, we eliminated other media names whose brands and franchises did not appear to be nearly as compelling over the long-term.

On June 13th, Gannett agreed to acquire Belo Corporation (BLC) and its 20 television stations that reach more than 14 percent of U.S. television households in a $2.2 billion transaction. The New York Times dubbed it, "…the biggest local television station sale in more than a decade."2 The acquisition will nearly double Gannett's broadcast properties (from 23 to 43) and create the fourth-largest owner of major network affiliates reaching nearly one-third of all U.S. television households. Gannett will have 21 stations in the top 25 markets and will become the second largest owner of network-affiliated television stations. While normally skeptical and wary of acquisitions, we immediately saw the value of this transaction and future possibilities for Gannett Investors also applauded the deal as evidenced by the fact that Gannett's stock closed +34% higher on the day of the announcement while Belo shares increased +28%. The reason being, Belo will not only accelerate Gannett's transformation into a diversified media company with higher profitability and returns—it will also give Gannett more leverage when negotiating the valuable retransmission fees local television stations receive from cable and satellite operators in exchange for the right to carry those stations on their systems. Size matters when seeking higher retransmission fees with cable and satellite distributors and also when bargaining with the broadcast networks for their cut of that revenue. Retransmission revenues create a dual revenue stream for Gannett, similar to cable networks, while reducing cyclicality from what has historically been an advertising-only business model. And whereas advertising can be hard to forecast, contractual agreements make retransmission revenues predictable and sticky. Moreover, we anticipate a meaningful increase in these revenues once broadcast network compensation becomes more aligned with their ratings.

Despite primetime viewership declines, television still remains the most effective mass advertising platform precisely because it reaches so many people at once. In fact, broadcast television’s significantly larger primetime ratings and greater household coverage give it a distinct advantage over cable. Even though the number of adults under 24 who regularly watch television has declined, adults 65 and older continue to watch. Bernstein Research estimates that adults 65 and over watch 8 hours of television a day, twice as much as adults aged 18-24.

While acknowledging the inherent structural issues in print media, we welcome Gannett’s multimedia diversification through strategic investments and acquisitions. In publishing, Gannett is succeeding in converting its customers from print to a digital platform with an all-access content subscription model that has been a significant driver of recent revenue stability. It is worth noting that the company’s digital platforms attract 54.6 million unique users each month. Meanwhile, broadcast trends remain encouraging. Strong local advertising—specifically from auto dealers, increasing political campaign expenditures and accelerating retransmission revenues—have propelled the company’s strong operating performance. Finally, CareerBuilder’s future looks promising (Gannett owns 52.9%) as labor markets improve and it continues to gain market share from competitors. Gannett CEO Gracia Martore has also proven to be a visionary leader, patient investor and strong capital allocator. To the latter point, she aggressively strengthened the balance sheet by substantially reducing debt before allocating capital to share buybacks, dividends and strategic acquisitions.

Even though we still like small town community newspapers—last week, Warren Buffett purchased his 30th community paper since November 2011—we think Gannett’s real value lies in its ongoing evolution. Given the stock’s recent performance, Wall Street seems to agree.

Business Description

Gannett Co Inc was founded in 1906 and incorporated in 1923. The Company is an international media and marketing solutions company and diverse local content providers in the United States. The Company through its network of broadcast, digital, mobile and print products, it informs and engages more than 110 million people every month. Its portfolio of brands offers marketers unmatched local-to-national reach and customizable, innovative marketing solutions. The Company being in digital media provides access to content on different platforms; digital marketing services to businesses to help them more effectively use digital technology to reach their sales goals; and Internet-based human resource solutions. The Company operates in three segments: Broadcasting, Publishing and Digital. The Company's Broadcasting Segment owns & services 43 television stations excluding owner-operators, following its acquisition of Belo Corp. in December 2013. Its Publishing Segment provides content through 82 local U.S. daily publications, including USA TODAY, a multi-platform news and information media company. Its Digital Segment owns and operates a number of stand-alone digital subsidiaries including CareerBuilder, Shoplocal and PointRoll. CareerBuilder is the global leader in human capital solutions, helping companies to target, attract and retain talent. Through its advertising, it generates revenue in Broadcasting Segment, from fees paid for retransmission of the company's television signals on satellite and cable networks, and payments for other services, such as the production of advertising content. In Publishing Segment it generates revenues primarily through advertising and subscriptions to Gannett's print and digital publications. Its advertising departments sell retail, classified and national advertising across multiple platforms including print, web sites, mobile, tablet and other specialty publications. The Company generates its digital revenues through online content subscription fees and advertising on its various digital platforms including more than 120 domestic web sites affiliated with its publishing and television markets, USA TODAY, Gannett Government Media and Gannett Healthcare Group. The Company publishes in major markets such as Phoenix, AZ.; Indianapolis, IN; Cincinnati, OH; Des Moines, IA; Nashville, TN; Asbury Park, NJ; Louisville, KY; and Westchester, NY. The company's publishing operations and affiliated digital platforms compete with other media and digital ventures for advertising. Publishing operations also compete for circulation and readership against other professional news and information operations and amateur content creators. The market for the Company's online recruitment solutions is highly competitive with a multitude of online and offline competitors. Competitors include other employment related web sites, general classified advertising web sites, professional networking and social networking web sites, tr

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